THE THRESHOLD EFFECT OF PUBLIC AND INTERNAL DEBT ON ECONOMIC GROWTH: THE CASE OF KENYA

This paper investigates the presence of threshold effect of public debt and internal debt on economic growth in Kenya for the period 1970-2018. The Smooth Transition Regression model of analysis is used to analyze the effect of public and internal debt on growth. The findings of this study indicate that the threshold level of internal debt in Kenya is 17.3115% implying that domestic debt positively impacts economic growth when this threshold level is exceeded. The public debt threshold estimate is 33.29% and growth is positively affected when public debt exceeds this level. The results of this study imply that public and internal debt have a U-shaped relationship with the economic growth rate in Kenya and that the rate of economic growth is dependent on the amount of debt owed by the country. These results imply that there is a need for appropriate policy actions on more productive use of debt to ensure economic growth.